Fitch Upgrades Brevard County, FL's IDR to 'AA+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the ratings on the following Brevard County,
FL obligations:

--Issuer Default Rating (IDR) to 'AA+' from 'AA';

--$48.4 million outstanding local option fuel tax (LOFT) revenue bonds,
series 2007 to 'A+' from 'A'.

The Rating Outlook is Stable.

SECURITY

The LOFT revenue bonds are secured by a six-cent levy per gallon of
motor and other fuels sold in the county. Revenues are collected by the
state and distributed to each county and its incorporated municipalities
based on a distribution formula formalized in an inter-local agreement.

KEY RATING DRIVERS

The upgrade of the county's IDR to 'AA+' from 'AA' reflects the
application of Fitch's new 'U.S. Tax-Supported Rating Criteria'
published on April 18, 2016 and specifically the county's strong
operating performance including maintenance of high levels of reserves
through the economic cycle supported by ample revenue and expenditure
flexibility, and low combined liability burden of debt and pensions.
Fitch expects the county's debt and pension liabilities to remain low
going forward given limited debt plans, rapid amortization of existing
debt, and participation in an adequately funded, state-administered
pension plan.

The rating upgrade to 'A+' from 'A' on the LOFT bonds reflects improved
debt service coverage, negligible expected growth prospects, volatility
of the pledged revenue stream but strong resilience through a moderate
downturn scenario. The rating also reflects Fitch's expectation that
LOFT revenues will not be leveraged to the 1.25x additional bonds test.

Economic Resource Base

The local economy is based on a diverse mix of aerospace, manufacturing,
agriculture and tourism. The Kennedy Space Center (KSC) serves as both
an area employment anchor and a tourist attraction. The presence of KSC,
despite termination of the space shuttle program in 2011, and the
county's highly trained workforce has stimulated the location of
numerous aerospace and other technologically--related firms within the
county. The aerospace industry within the county has been growing and
expansions at Northrop Grumman, Boeing and Embraer are either planned or
underway.

Revenue Framework: 'aa' factor assessment

Fitch expects county revenues to grow in line with inflation which is
consistent with its slowly growing population and employment base. The
county retains the legal ability to generate substantial additional
revenues under its 10 mill property tax cap.

Expenditure Framework: 'aa' factor assessment

County expenditures cover a wide array of government services. Overall
spending patterns are expected to align with future revenue growth.
Management has significant expenditure flexibility through its partial
control of headcount and moderate carrying costs, despite having made
large spending cuts during the past recession.

Long-Term Liability Burden: 'aaa' factor assessment

The county's long-term liability burden that includes debt and net
pension liability is modest at 4.2% of personal income. Fitch expects
this metric to remain low given limited debt plans, rapid amortization
of direct debt and adequate funding of the state-run pension plan.

Operating Performance: 'aaa' factor assessment

Management, through its considerable revenue and expenditure
flexibility, is expected to maintain available reserves within a healthy
10% to 15% of expenditures through the economic cycle.

RATING SENSITIVITIES

CONTINUING STRUCTURAL BALANCE: Fitch expects that the county will
maintain balanced operations at or above a level consistent with the
rating.

COVERAGE OF LOFT DEBT SERVICE: The rating on the LOFT bonds is sensitive
to the level of debt service coverage provided by LOFT receipts.

CREDIT PROFILE

The county's economy was hit hard by the recession with employment
falling by over 8% between 2006 and 2010 and unemployment rates topping
11% in 2011. Since 2011, economic activity has generally recovered but
employment growth has been tepid, averaging 0.6% growth between 2010 and
2015. Factors which have hindered gains in employment include
termination of the space shuttle in 2011, federal sequestration in 2013
and cutbacks in personnel in the county's schools, the largest employer.
Unemployment rates have gradually declined since the 2011 peak and the
May 2016 rate of 4.7% equaled those of the state and nation.

Housing values declined by over 50% between mid-2006 and January 2012
according to the Zillow Group. Values have slowly risen since and were
up 9.7% over the past 12 months but remain well below the pre-recession
peak. Zillow projects a 4.5% increase in home values over the next year.
The housing recovery has boosted the county's mostly residential tax
base with steady growth since fiscal 2013.

Revenue Framework

Property taxes comprise the major source of general fund revenues and
represented about 55% of total revenues and transfers in. Property tax
revenues had declined both during and immediately after the recession as
taxable values fell but, with the recovery of the tax base, have been on
the upswing in recent years. Since fiscal 2012, the county has been
gradually lowering its tax rate, tempering the rise in property taxes
each year. Other major sources of revenue include intergovernmental
revenues (17%) consisting mainly of state revenue sharing and half cent
sales tax distributions and charges for county services (14.5%).

Modest increases in county revenues are expected to continue going
forward, in line with the county's slowly growing population and
employment. This growth is anticipated to continue at a rate below U.S.
GDP growth but consistent with inflation.

The county's current tax rate of 5.47 mills allows for generation of
substantial additional revenues under the state 10 mill property tax
cap. Fitch estimates that the county could generate approximately $128
million in additional revenues if it chose to utilize the remaining
property tax margin or about 60% of the fiscal 2016 general fund budget.

Annual changes in the property tax rate are determined using a roll-back
or revenue neutral rate, which is then adjusted for changes in the
Florida per capita personal income. However, this limitation may be
overridden by a super-majority or unanimous vote of the county board of
commissioners. The county's charter limits the property tax levy such
that budgeted revenues for the current fiscal year cannot increase by
more than the lesser of 3% or CPI over budgeted revenues in the prior
year. This limit can also be overridden by a supermajority vote of the
commissioners but only on a finding of an emergency or critical need.
Taxable property classified as new construction and other improvements
are excluded from the calculation. The county also has the ability to
increase various license and permit revenues and service charges that
make up a smaller but still notable portion of its revenue base.

Expenditure Framework

The county provides a full array of government services to its citizens
with the exception of primary education, which is provided by the county
school board. Public safety represents the largest general fund
expenditure item at 44% of the budget and includes policing activity and
detention/correction operations. Fire rescue operations are reported in
a separate emergency services fund. Public safety spending fell through
fiscal 2012 but has since increased steadily through fiscal 2015.

Over the long term, county spending has generally been in line with
revenue growth. This trend is expected to continue in the future as
service needs continue to grow modestly.

During the recession, in response to significant revenue declines,
county management scaled back spending utilizing layoffs, furlough days
and across the board budgetary cuts. As a result, general fund spending
fell by 20% between fiscals 2008 and 2012. Spending has since steadily
increased by a cumulative 9% through fiscal 2015. The county retains
significant cost cutting flexibility through its ability to temporarily
control employee headcount and compensation. Officials have indicated
that available measures to trim spending include layoffs, service level
reductions, operating hour reductions and reducing employer
contributions for health insurance. Carrying costs are moderate at about
12% of spending.

Long-Term Liability Burden

The county's long-term liability burden includes both debt and pension
liabilities and is modest at 4.2% of personal income. This ratio is not
expected to change substantially going forward given limited debt
issuance plans and adequate pension funding levels.

Debt levels are generally modest with total debt to personal income of
3.3%. Outstanding bonds consist primarily of limited ad valorem tax
bonds and revenue bonds, including sales tax and various gas tax-secured
bonds. The county has no unlimited tax general obligation bonds
outstanding. Amortization of direct debt is rapid with over 70% of
principal retired within the next 10 years. The county's five year
capital improvement plan includes a manageable $370 million of projects
of which almost 70% are attributable to enterprise operations. There are
no firm plans for additional bonds.

County employees participate in the Florida Retirement System (FRS), a
statewide multiple employer cost sharing pension program. FRS is
adequately funded with an 85.9% funding ratio as of June 30, 2015, based
on Fitch's adjusted discount rate of 7%. The county's adjusted
proportionate share of FRS net pension liability constitutes a modest
0.9% of personal income.

Operating Performance

County management has demonstrated its ability to adjust both revenues
and spending when faced with economically driven downturns in revenues.
To offset revenue declines experienced between fiscals 2010 and 2012,
county officials trimmed spending by 15% while also raising tax rates
and utilizing some fund balance to maintain operations. Fitch believes
the county would continue to utilize its budgetary flexibility and solid
reserves to offset the effects of a moderate recession-driven decline
while maintaining reserves above the county's 10% minimum target.

The county is expected to maintain available reserves within the range
of 10% to 15% of spending as has been the case in the recent past.
Fiscal 2015 general fund operations reported a modest surplus of about
$3 million, raising unrestricted fund balance to $29 million or a
healthy 11.9% of spending. Fiscal 2016 operations are expected to result
in a modest surplus of about $1.7 million.

LOFT Bonds Upgraded

The rating upgrade to 'A+' from 'A' on the LOFT bonds reflects improved
debt service coverage, slow expected growth prospects, historic
volatility of the pledged revenue stream and strong resilience through a
moderate downturn scenario. The rating also reflects Fitch's expectation
that LOFT revenues will not be leveraged to the 1.25x additional bonds
test.

Pledged LOFT revenues consist of revenues received by the county from
the first six cents of the local option fuel tax levied per net gallon
on motor fuel sold within the county pursuant to Section 336.025(1)(a),
Florida Statues. The state collects the LOFT and distributes it back to
the county and its municipalities in accordance with an inter-local
agreement between the county and municipalities within the county;
however, the rating on the LOFT bonds is not tied to that of the
county's IDR. Under the existing inter-local agreement, LOFT proceeds
are allocated 50% based on population and 50% based on transportation
expenditures made over the preceding five years. The county's share of
LOFT distributions must be at least 47.14% of total county
distributions. The inter-local agreement expires in 2037 coincident with
the final maturity of the bonds.

LOFT collections increased by over 25% in fiscal 2012 due to the
installation of 24 large (6.3 million gallons) diesel storage tanks at
Port Canaveral. Revenues were essentially flat in fiscals 2013 and 2014
but grew by 6.2% in fiscal 2015. Year-to-date (YTD) collections were up
10% from last fiscal year although the difference at the end of the
fiscal year may narrow as a large true-up payment in September 2015 may
not be repeated in 2016. Fitch expects more modest growth in LOFT
revenues in the future.

To evaluate the sensitivity of the LOFT to cyclical decline, Fitch
considers both modeled revenue sensitivity results (using the same 1%
decline in national GDP scenario that supports assessments in the IDR
framework) and the largest decline in revenues over the period covered
by the revenue sensitivity analysis. Based on the 14-year pledged
revenue history FAST generates a 5% scenario decline in pledged revenues
and the largest actual cumulative decline in historical revenues is a
6.5% decline in fiscal year 2008.

Based on LOFT revenue of $9.5 million in fiscal 2015 which cover maximum
annual debt service (MADS) by 1.63x, Fitch estimates the structure could
tolerate a 38% drop in revenue which is 7.8x the scenario results and 6x
the largest actual revenue decline in the review period. These results
are consistent with an 'aa' level of coverage cushion. Assuming leverage
to the 1.25x ABT, the scenario results are mixed. However, management
has indicated that it has no intention of further leverage of the
revenue stream. LOFT revenues in excess of debt service are used to fund
pay-as-you-go road projects.

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